How Has the Defend Trade Secrets Act Fared Two Years After Enactment?

July 9, 2018—About two years ago, on May 11, 2016, the Defend Trade Secrets Act (“DTSA”) was signed into law. The DTSA amended the Economic Espionage Act of 1996, by creating a private right of action in federal court for trade secret theft. To bring such an action, the party bringing suit must be the owner of the trade secret, the trade secret must relate to interstate or foreign commerce, and the trade secret must have been misappropriated.
Since its enactment, most cases brought under the DTSA have also included a cause of action under a state’s uniform trade secret act (UTSA) statute. In evaluating the DTSA, federal courts have primarily relied on state theft of trade secret case law in rendering ruling. For example, in Panera, LLC v. Nettles, 2016 U.S. Dist. LEXIS 101473 (E.D. Mo. Aug. 3, 2016), the court analyzed the plaintiff’s claims under the Missouri UTSA and then included a footnote stating that the same conclusion was reached under the DTSA. See Id. (“[a]lthough the Court’s analysis has focused on Panera’s Missouri trade secrets claim, an analysis under the Defend Trade Secrets Act would likely reach a similar conclusion.”). In another case, the court performed its analysis under the Washington UTSA then simply stated that a same result would result under the DTSA. See Earthbound Corp. v. MiTekUSA, Inc., 2016 U.S. Dist. LEXIS 110960 (W.D. Wash. Aug. 19, 2016)(“The same evidence demonstrates a likelihood of success on the merits on Plaintiffs’ claim for violation of the Economic Espionage Act, as amended by the Defend Trade Secrets Act.”).
Though the DTSA limits damages to actions in violation of the DTSA occurring after the effective date of May 11, 2016, courts are considering continuing misappropriation that started prior to the effective date. See, e.g., Brand Energy & Infrastructure Servs. v. Irex Contr. Grp., 2017 U.S. Dist. LEXIS 43497 (E.D. Pa. Mar. 23, 2017); Adams Arms, LLC v. Unified Weapon Sys., 2016 U.S. Dist. LEXIS 132201 (M.D. Fla. Sept. 27, 2016). However, recovery has been limited to post-DTSA effective date.
Though the DTSA provides for ex parte seizure, courts have been cautious to utilize this provision. As an overview, a plaintiff may seek a court to order law enforcement to seize any property “necessary to prevent the propagation or dissemination of the trade secret” without affording the accused party an opportunity to present a case before the court, either by way of filing a response or being heard at a hearing. This provision may be used in extraordinary circumstances. A party seeking an ex parte seizure must show that the information at issue is a trade secret – that the target of the seizure misappropriated or conspired to misappropriate the trade secret and that the target has actual possession of the trade secret and any property to be seized. The party must also identify the particular matter to be seized and location of the matter. Also, the applicant cannot publicize the requested seizure. The only known decision where an ex parte seizure request was successful is Mission Capital Advisors v. Romoka, No. 1:16-cv-05878-LLS (S.D.N.Y. July 22, 2016). Even though the plaintiff filed a complaint under the DTSA seeking an ex parte seizure, the court initially refused to enter the ex parte seizure order. Instead, the court provided a temporary restraining order and an order to show cause why a preliminary injunction should not be entered. The defendant did not respond that resulted in the court entering an ex parte seizure order for the U.S. Marshal to copy the plaintiff’s customer contact list from the defendant’s desktop computer as evidence and to then delete the customer contract list file from the defendant’s computer. Hence, the defendant’s contempt of court actually motivated the court to enter the ex parte seizure order.
The DTSA also provides for a whistleblower immunity notice provision in 18 U.S.C. § 1833(b)(3). Immunity is afforded to anyone who discloses in confidence a trade secret to a government entity (federal, state or local), including an attorney, in relation to a criminal investigation. This provision also covers disclosures of trade secrets made in court documents that are under seal. Immunity covers both federal and state trade secret law. Employers are expected to provide notice of this provision to employees, which may include independent contractors and consultants, such as in any contract or agreement (non-disclosure agreement, non-compete agreement, severance agreement, etc.) with an employee that governs the use of a trade secret or other confidential information of the employer. Failure to provide notice results in the employer not being able to recover exemplary damages or attorney’s fees that are provided under the DTSA should theft occur.
The first known case where the whistleblower immunity notice provision was considered is Unum Grp. v. Loftus, 220 F. Supp. 3d 143 (D. Mass. 2016). Unum sued its former employee, Loftus, for alleged misappropriation of trade secrets under the DTSA and the Massachusetts Trade Secret Act. Loftus was captured on surveillance video, over days, leaving one of Unum’s facilities with boxes, shopping bags and briefcases of documents both during and after hours. Even after being questioned, Loftus was seen leaving Unum’s office with his company laptop and another shopping bag. Unum requested that Loftus return the materials and Loftus responded through counsel, eventually returning the laptop, but not the documents. Unum sought a preliminary injunction and Loftus opposed by claiming immunity since he turned the information over to his attorney to pursue alleged unlawful activities against Unum. The court denied the motion by finding that the whistleblower provision was only an affirmative defense. Ultimately the court ordered all documents returned to the employer. Since the outcome of this case did not exactly comport with the DTSA, this outcome may have had more to do with the conduct of Loftus, specifically the witnessed conduct of Loftus in collecting Unum’s trade secrets.
In a more recent case, the court took a position more in line with the language of the DTSA. In Christian v. Lannett Co., 2018 U.S. Dist. LEXIS 52793, Civil Action No. 16-963 (E.D. Pa. Mar. 29, 2018), the court granted immunity. Plaintiff’s former employer brought a counterclaim under the DTSA for trade secret misappropriation after plaintiff filed a discrimination suit under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Acts, and the Family and Medical Leave Acts. Defendant’s DTSA counterclaim focused on the contention that after plaintiff’s employment was terminated she retained over 22,000 pages of her former employer’s confidential material. She disclosed this material to her counsel who in turn produced it to defendant in response to defendant’s discovery requests related to the discrimination claims. Plaintiff moved to dismiss the DTSA claim, arguing that she was immune from liability “because the only alleged disclosure of trade secrets which took place after the effective date of the [DTSA] occurred through a production of documents provided to her attorneys in confidence, pursuant to federal discovery requirements.” The Court agreed with Plaintiff. After recognizing that “the DTSA provides immunity for the disclosure of a trade secret ‘in confidence…to an attorney…solely for the purpose of reporting or investigating a suspected violation of law,’” the Court found that the production of defendant’s alleged trade secret material fell within the whistleblower immunity safe harbor because “plaintiff’s alleged disclosure was made to plaintiff’s counsel pursuant to a discovery Order of this Court, within the context of a lawsuit regarding violations of Title VII, the ADA, and the FMLA.”
Going forward and as further case law develops with respect to the DTSA, businesses should remain vigilant with identifying its trade secrets and taking reasonable measures to protect them. These efforts should also include ensuring that all contracts that relate to confidential information including, but not limited to, trade secrets, provide proper notice regarding the whistle blower immunity provision.
*Originally published at a former law firm started by Terry Sanks.